ProSight Global, Inc.
Q3 2020 Earnings Call Transcript

Published: 10 Nov 2020

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the ProSight Specialty Insurance 3Q earnings call and webcast. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Joe Hathaway, Corporate Communications Director. Please go ahead, sir.
Joe Hathaway:

Thank you, Ian. Good morning everyone. Welcome to the third quarter 2020 earnings conference call for ProSight Global, Inc. With me on the call today are CEO and President, Larry Hannon; Chief Financial Officer, Buddy Piszel and Chief Underwriting and Risk Officer, Bob Bailey. Following our prepared remarks, the call will be open for questions. Yesterday afternoon, we issued our third quarter 2020 earnings release, which is available on our website at investors.prosightspecialty.com. Let me remind everyone that during this call, management may make comments that reflect their intentions, beliefs and expectations for the future. We caution that such forward-looking statements are not guarantees of future results and that actual results may differ materially from those forward-looking statements. For a discussion of some of the risks and important factors that could affect our future results and financial condition, please see the cautionary language regarding forward-looking statements in yesterday's earnings release and the Risk Factors sections of our reports and filings made with the SEC. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe are useful in evaluating our performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures can be found in our earnings release. With that, I'd like to turn the presentation over to our CEO and President, Larry Hannon.
Lawrence Hannon:

Thank you, Joe. Good morning, everyone. And thank you for joining today's call. I would like to start with acknowledging how proud I am of ProSight's employees. Their dedication throughout this global pandemic and in an extremely busy cat season has been outstanding. And their collective effort affirms why our customers and distribution partners choose to do business with ProSight. Turning our results for the third quarter. I'm disappointed that we delivered a combined of 108.3%. Yes, it was primarily due to an abnormally high, almost 12 points of cat. But I would be disappointed in any quarter where we do not make an underwriting profit regardless of the reason. We take great pride in our underwriting execution and expect to consistently deliver an underwriting profit as we had in the previous 12 quarters before this one. In fairness, we did have several positives in the quarter that bode well for our future. Normally, I would spend time detailing that success on this call. For example, our rate execution was very strong at 11.8%, excluding work comp, and 10.9%, including work comp. Our underwriting -- our underlying loss ratio was 59.9%. Just over 60% of our niches collectively grew 25% in the quarter versus the third quarter of 2019. And even for many of the niches that were significantly impacted by COVID, and where we have not yet seen a bounce back in written premium, we continue to grow our customer base. Submission counts for many of our niches are up and our pipeline for adding new niches in the future is very strong. Our investment income results were excellent. Our G&A spend was $3 million less than it was in the third quarter of 2019. And there are certainly other positives I could spend time on. As I these achievements, I understand that the quarter was not successful. When I turn it over to Bob, he will spend time specifically on what drove the quarter's underwriting results. Lastly, I'd like to affirm the guidance that I provided during our last call for written premium, COVID related losses and our expenses. I believe the ranges still hold and would not change any of them assuming what we know today to be how the year finishes out. At this time, I will turn the call over to our Chief Underwriting Officer Bob Bailey, and then our CFO, Buddy Piszel. Bob?
Robert Bailey:

Thank you. Good morning, everybody. As Chief underwriting officer, I take our underwriting quality and the measures of it very, very personally. And this cat quarter's performance is not how we built the book, or designed the book to perform. I can assure you that we have reviewed our procedures and asked ourselves all the questions you might be asking now and concluded that the losses in the quarter are largely an aberration driven by one of the highest frequency cat seasons, both nat cat and otherwise in history, and are not the result of our failure to manage the growth and the risk profile of our book. For perspective, we experienced about $46 million in gross non-attritional property losses in quarter or about $23 million net of reinsurance. That's considerably more than what we would have expected, but what we've ever experienced. We have reviewed our aggregations, and in fact, our Tier 1 counties, those that touch the coast -- those counties that touch the coast, continue to decline as a percentage of our property book, as they have every year since 2015. And in short, we are not becoming more exposed to coastal wound perils, in fact, just the opposite. It's also important to note that about $23 million, or about half of our total non-attritional gross loss was driven by just 3 single large property losses. Said differently, if just those 3 buildings had been spared, we wouldn't be having this discussion. This was much more about bad luck with a few large losses than any real buildup of exposure in a cat zone. I've personally met with the entire property team to redouble our common understanding of the kind of risk profile that we want to build. I don't feel like there was nor is any misunderstanding. Obviously, this much activity in the quarter focused against property, both weather and otherwise, created more opportunity for things to just go wrong. We will continue to minimize and reduce our Tier 1 footprint going forward, as we believe this is the best way to reduce that exposure to "being unlucky." Beyond that, I do feel like I need to say how pleased I am with largely everything else that is evolving and trending. As Larry mentioned, our underlying loss ratio ex-cat has improved. Our rate execution of nearly $0.11 for the quarter is outstanding, especially considering we don't write those lines of business, such as D&O contingency, high access, like that, that are being the hardest hit in the market. We continue to shrink our workers' comp profile, because ultimately, we believe that rate levels there are increasingly less adequate. Our inventory of COVID related claims continues to shrink and is now below 150. Our pipeline for new business is growing. We are fighting ways to win, and we are strengthening the book and that I'm proud of. Now, I'd like to ask Buddy Piszel to share with you more specifics about the performance of the quarter. Buddy?
Anthony Piszel:

Thanks, Bob. As Bob and Larry have already said, this was a tough quarter for ProSight. Our otherwise positive underlying performance was overwhelmed by $22 million of cat related losses, resulting in a reported net income and adjusted operating income of $1.5 million. Let's go through the drivers. Gross written premium came in at $203 million, down 10% versus last year's quarter. That's an improvement versus the 20% decline we saw in 2Q. Many of our customer segments performed well. Construction, Marine and Energy and Professional Services combined grew by 11.7% from last year's quarter with again strong rate execution. We're still seeing a severe low in our large Media and Entertainment segment. While premiums have not yet rebounded, we continue to add customers and believe we are strongly positioned in that space once touring entertainers begin to tour again. In Transportation, gross written premiums for taxis and buses are down 50% from the prior year quarter. And like media, we are adding accounts, but until economic activity restores, we won't see the premium pickup. A real positive in the quarter is our captive effort that we just launched earlier this year. We added about $17 million of premium in the third quarter. We have a very active pipeline in captives and feel positive about the long term prospects for this addition to our capability. On the loss ratio front, we reported a 71.5% loss ratio and ex-cat, a very solid 59.9%. Recall, historically, since 2011, we have averaged around 1 to 2 percentage points of cats with no year, a significant outlier. So 2020 is truly an aberration. As Bob indicated, we feel good about our underwriting controls as they relate to our property exposures and expect to return to historical averages in the future. On our G&A expenses, we continue to manage aggressively. Year-to-date, our headcount is down as is our T&E and IT costs. And in the quarter, G&A is down over 11% from last year's quarter. In the first half of the year, we added $2.5 million of bad debt expense due to potential deferred premium collection concerns. In Q3, our premium collections at over 90 days are stable, and we concluded that no more provisioning for collectibility concerns are warranted. As Larry mentioned, we have a clear line of sight on how we will achieve our 34.6% expense ratio in 2022, a 200 basis point improvement from 2019, and we are fully prepared to achieve that goal. Net investment income came in over $20 million, another strong quarter. And at this point, we have fully recovered from the negative market disruption in the first quarter. Our credit complexion is solid. We made progress in reducing our floating exposure, and we are taking positive actions to reduce market spread compression. Our investment portfolio grew double digits over last year's quarter. And again, our limited partnerships performed really, really well. The unrealized gain in the portfolio grew $24 million in the quarter from Q2 to -- I'm sorry, grew in the quarter $24 million to $85 million, which contributed to our book value growth per share of 4% from Q2 to $13.34. Just a reminder, our senior notes mature later this month and we'll start to benefit from lower interest costs that even with higher debt levels, should save us $3 million to $4 million annually. So to sum it up, overall, a tough disappointing quarter. Despite the worst cat quarter in the company history, we managed a small profit and grew book value. And though not obvious in the results, there are several positive underlying factors that give us momentum going into 2021. With that, I hand it back to Larry.
Lawrence Hannon:

Thanks, Buddy. Operator, we can open the line for questions, please.
Operator:

[Operator Instructions]. Our first question comes from the line of Yaron Kinar of Goldman Sachs.
Yaron Kinar:

My first question goes back to the cat losses. Maybe you can offer a little more color as to where exactly those catastrophes were and losses were incurred? And your thoughts about the potential impact of climate change. You talk about lowering your exposure to the coast, but what about your exposure in other parts of the country?
Lawrence Hannon:

This is Larry. I'm going to have Bob tackle that one. Go ahead, Bob.
Robert Bailey:

Obviously, we talk about the hurricanes, we talk about wind storms, we talk about those sorts of things. But let's face it, where I live in, Northern California, it was pretty rough year as well. We -- from a Cal Fire perspective, we did -- we set records this year on the West Coast too. Didn't want to be outdone apparently by the East Coast. I think how we feel about it. We're going to -- when middle of next year when property treaties come up, we're definitely going to have to sit down and think about what our aggregations look like? I can tell you from a top aggregate perspective this really -- we buy very, very conservatively. And there's no evidence or anyway near that kind of level. But as we look at how the footprint is evolving from a property perspective, we're definitely going to have to sit down and say, do we think a normal of 6 and a wildfire season of x is what we should continue to a to buy reinsurance to accommodate. Or do we think 6 is really going to 12, like it was this year or some number in between. So to me, I think it's less about responding specifically to these losses, which, frankly, I don't think, given the magnitude of the cat season, particularly performed in an outsized way. I think we're just going to have to ask ourselves what do the experts think about ongoing weather patterns and how do we react to that. I'm sorry, there's a siren in background.
Lawrence Hannon:

No. But, I mean, I think to Bob's point, Yaron, right. Like in our particular case, the quarter, right, was Oregon wildfires and hurricanes, the dominant cat pieces that we look at. And as Bob just talked about, right, this is 2x the -- what you would see as the average cat season, right, 12 storms versus 6. We've had other storm seasons, obviously, where we've gone in and that traditionally add our point to 2 points of cat for the year. There might be a little bit of that in the second quarter under normal circumstances, sometimes it's a little bit in the fourth quarter. But the majority of that would have been in the third quarter historically. And there were some storms last year, as an example, we had 0 points of cat in the third quarter of last year. So we do have to continue to watch and assess that. I think we're being as smart as we can be around the aggregations that we will look at that are exposed to wind. Fire is -- on the West Coast is evolving consistently quarter-by-quarter, year-by-year, and we're, obviously, taking measures for that. Knock on wood, we had in the past some convective storm in the middle of the country losses, but it wasn't what we saw in the second or third quarter of this year. So we're going to -- and we're not significantly exposed in the center of the country, either in the way that our book works. So we'll have to continue to watch that year on, but it is something that we're paying attention to.
Yaron Kinar:

Okay. And can you remind us, do you have an aggregate within catastrophe cover? And then would you consider maybe building that up more considering lessons learned from this year?
Robert Bailey:

Yes, we do. Obviously, the -- as I mentioned, our true aggregate -- the top side cover, I think we buy incredibly very conservatively -- always have, and it's primarily driven because of some of our concentration out of the New York area -- New York City, surrounding counties there. We probably buy, I would say, all in to somewhere in the 1 in 400 year return period range. So it's a very conservative buy. I think the question is, there's more about sort of the retention and/or do we think about -- do we think about a sideways cover that limits the number of retentions we have. And I think there, the -- I'll go back to -- I think we have to let the experts upon more as the season finishes on what we think the nature of storm frequency is. If it -- I don't want to overreact to this event -- to this year, which was obviously not what we would have expected, given that there was also some really bad luck too, compounded with that. I don't want to overreact to that. But at the same time, I don't want to sit there and assume everything is going to go back to normal from a weather pattern and/or fire season pattern when it -- when that's not what the science says. If it does say -- if we do conclude that now, you know what, maybe it's not 12, but it's a number more like that. Then we need to adjust. I think -- yes -- no, there's lots of ways. That doesn't immediately mean we run out and buy reinsurance. I think ultimately, what that's telling us -- us, meaning an industry is that, property in these places is still not priced. It's -- it still needs more rate, whether we're -- whether the rate is kept to fund the loss, to continue with it at $1.5 million, even though the losses are greater. Or we're turning it over to reinsurance -- to reinsurers. Either way it probably -- if we do believe that there's more risk from the storm patterns, it means property is not done -- getting rate, not by a long shot.
Operator:

Your next question comes from the line of Mark Hughes of Truist.
Mark Hughes:

I'll say, for what it's worth, a lot of people have had some unusual losses this quarter and yours don't seem particularly or obviously out of line. So it's been tough for a lot of folks. The workers' comp pricing in the quarter, what was that in just the -- that line?
Robert Bailey:

Workers' comp pricing, I'll take it -- hang on, let me get you an exact number, because I have it handy. The exact number for workers' comp was actually minus 0.6% quarter-to-date.
Mark Hughes:

That maybe a little bit better, I think you were down 2% last quarter?
Lawrence Hannon:

Yes, I think that's right, Mark.
Robert Bailey:

Yes.
Lawrence Hannon:

Yes. We've also -- Bob, you might want to comment on the fact that we've shrunk the primary comp book as well.
Robert Bailey:

Yes. I think that's the real story. The real story is -- well, definitely 0.6% is moving in the right direction, I guess. The real story is it's negative 0.6% on a much smaller book. I mean, 3 or 4 years ago, our -- the comp line represented about $250 million in premium. This year, it might be --
Lawrence Hannon:

Mark, that's primary and excess comp.
Robert Bailey:

Yes, yes. I'm talking primary one. It might be 60. So it's a fairly dramatic change. And I think we're just seeing less and less well parsed accounts out there.
Mark Hughes:

Yes, understood. How about the loss ratio in the quarter ex-cat was very good. How much of that was COVID related or just a good experience?
Lawrence Hannon:

Go ahead Buddy.
Anthony Piszel:

It really wasn't COVID related, Mark. The real benefit we saw -- and it wasn't a lot, because we got about 1 point of improvement from lower these dam frequencies. So that came through in the quarter. But other than that, it wasn't direct COVID related.
Mark Hughes:

Larry, you had mentioned the guidance that you discussed last quarter, you wouldn't really change. Given what you saw in Q3, I'd be curious to sort of refresher on what that implies, you think, with respect to fourth quarter, maybe written premium? Any other items you'd like call out?
Lawrence Hannon:

Yes. No, it's a great question. And I think it's an interesting one, because for us -- and we've shared this now a couple of quarters in a row, as you know, Mark, is that, our top line has been this most significant thing affected by COVID for us. And we've got roughly 1/3 of our premium when you think about it, that's going to be between the things that we do in the Transportation space that have yet to bounce back and the Media and Entertainment space. So when we look at those two pieces, right, being down roughly 40% or so year-to-date, when those bounce back is going to be directly related to when we see kind of the premium kick back into a very significant growth here. When I said that -- in my opening comments that we had about 60% of our niches that grew 25% for the quarter, as you might imagine, those are the ones that are not significantly affected by COVID for the most part, right? There's a combination of rate, there's a combination of new business. But it is a significant number of our niches, right? It's nearly 30 of our niches that are in a very significant growth period. And we're looking at those as just being kind of lost in the fact that we have yet to see anything really bounce back for the Entertainment space and the Transportation space. So as school buses come back online, which they did a little bit in September, a little bit more in October, we'll see a little bit of growth there. The charter bus book hasn't come back yet at all. Taxis are still relatively light. Obviously, our entertainers -- there's not a ton of filming going on. There's not a lot of touring entertainers that are out there. So when you think about those pieces, are they going to come back in the fourth quarter? Where we're looking -- well, our assessment on that, Mark, would be no at this point, right, because we're looking at what's going around the country from a COVID perspective, and it's likely that, that's going to extend sometime into next year. Now, the news we saw yesterday on a vaccine, when does it get delivered? What does that mean? How quickly does that rebound in 2021? That's something we're watching very closely. We would think about it right now, absent a vaccine or something that was significant, we would tell you that it would probably be second half of the year, next year when you'd see that significant bounce, right? You'd see a very large bounce in Transportation, a very large bouncing Entertainment, coupled with all the other things, and you kind of hit the growth accelerator then. With the vaccine, it probably goes a little bit faster, and we'd have to watch that. But specifically to your question, I don't see that rebound in the fourth quarter. So that means probably for us a quarter that's consistent with what we just did in the third quarter, or it will happen in the fourth. On the other guidance, the COVID part, from a loss perspective, as we've shared before, we see a little bit in the comp space. A little bit that's kind of evolving and kind of seeing itself through, but a very small number of claims in the Media space, and other than that, we don't see a lot. So when I said 0, 1.5 points last quarter, it's probably leaning towards the good side of that range. And when I talked about what we would look at from an expense perspective, the expenses that we're looking at, we've done the studies. We feel good about the bad debt positioning. So it probably isn't going to be a drain on us in the fourth quarter, just like it wasn't in the third. And we'll get back to some of the real discipline we've had on the expense side, starting to show through in the fourth quarter and into next year. So, hopefully, that gives you a flavor for the pieces that I provided the guidance on last quarter in a more specific way.
Mark Hughes:

If I might squeeze one more in the -- kind of the net investment income on a run rate, without a lot of moving parts we've had lately, what's the kind of the sustainable run rate on that? At least as the portfolio sits now?
Anthony Piszel:

Yes. A fair question, Mark. I mean, because spreads are down, the core yield on the portfolio that excludes the LPs are down about 50 basis points from last year's quarter. So portfolio on a year-to-date basis, the core yield, excluding the LPs, is around 3%. Our reinvestment rates are more around 2%. So we would expect continued pressure there. That we're doing some smart things with private placement and private placement corporates and taxable munis, nontaxable munis too mute that compression. But we would consider that we're probably under a little bit more pressure on the yield going forward, probably sub 3, excluding the LPs.
Mark Hughes:

And then if I translated that into net investment income, you did $20 million this quarter, back to kind of the high teens, mid-teens?
Anthony Piszel:

Yes. I think that high teens, mid-teens. Remember, the portfolio is growing. So we would expect another 10%-plus growth in 2021. So that will mute some of that pressure on the yield. We wouldn't expect -- yes, I just -- let me close on. We wouldn't expect investment income to go backwards next year. We just wouldn't expect it to go forward as much as we would have hoped.
Robert Bailey:

Thanks Mark.
Operator:

Our next question comes from the line of Ron Bobman of Capital Returns.
Ronald Bobman:

I think it was Bob who was commenting about the reduction in the property booking. Bob, I think you referred to Tier 1 -- the Tier 1 portion of the property book, what did you mean by Tier 1, if I heard you right?
Robert Bailey:

Yes, sorry, letting a little nerdery show here. Tier 1 counties are essentially -- simply just counties that touch the coast. So I think all the counties that kind of ring the Gulf and then from Florida up through Maine. We do augment that a little bit. There'll be some counties that, they don't necessarily text the coast, but they're really close, so we'll call them Tier 1 as well.
Lawrence Hannon:

And that certainly, Bob, that's as a percentage of our book, that is strong. So the overall property book can grow. But, obviously, as a percentage of the book, it would be less going forward.
Ronald Bobman:

And I think you also mentioned that if it weren't for -- and Larry, you provided some good sort of accountability and acknowledgment wordings. But I think, Bob, you mentioned -- or maybe it was, Larry, except for these three buildings -- and I'm sorry if I missed. I got distracted for a moment or two earlier in the call. If I heard you right, the three buildings contributed how much of the $22 million?
Robert Bailey:

The three buildings were about half of our gross loss. I didn't convert that into net just because it depended on what else happened, and so it's kind of tough to pull them out and do the what if game, because -- but on a gross basis, of the $43 million those three locations separately, we're about half of that.
Ronald Bobman:

So that was actually I was going to ask you. What on a per property basis, what's the gross policy limit that you're willing to issue max wise? And what's the max net you're willing to retain per property?
Robert Bailey:

Yes. We can do in-house gross limit of up to $45 million. It's not fairly common by the way, but we can't. More common is probably somewhere under $10 million. However, we have -- we have treaty support up to $45 million. Our net on anything would be $3 million for -- per risk. Now that does exclude some things. There's some things where it's actually far less than that. For example, some of our niches will buy specific covers for just that niche. If we're building into a book, and we're a little less certain than we'd like to be. We don't have a good dataset to rely on, we might buy -- we might buy some cover lower on. But the most it would ever be would be $3 million.
Ronald Bobman:

So these three buildings did not contribute more than $9 million of the net loss $22 million. Am I thinking about that right?
Lawrence Hannon:

You have to put the reinstatement part of it in there, too.
Robert Bailey:

Yes.
Lawrence Hannon:

So it could be those 3 -- again, we didn't parse it out that way. But in theory, that $5 million of reinstatement is part of the $22 million net, right -- $17 million worth of net losses, $5 million of reinstatement gets you at $22 million. So the whole $5 million, part of the $5 million, you'd have to figure that part of it out if you're going to look at it that way.
Ronald Bobman:

But I thought on the casualty side, your limits were sort of like under $1 million ex-workers' comp.
Robert Bailey:

On the casualty side, we can do net in-house as much as a $10 million umbrella, so for an $11 million like gross. When Larry has historically referred to the vast majority of our limits are under $2 million, he's just talking about the vast majority of our policy limits. Well, that's which we actually do. It's different by --
Lawrence Hannon:

85% of our policy limits are $2 million or less is the comment you're referencing.
Ronald Bobman:

Yes. No, I'm just sort of focused on when lightning strikes, it seems to find the exposures.
Robert Bailey:

Yes, understood. It does.
Ronald Bobman:

Shifting gears on loss reserves. I was wondering is there sort of a regularity, so to speak, a seasonality where you sequence your loss reserve reviews? And could you talk about -- do you do that with any sort of regularity every fourth quarter or every first quarter, whatever it might be? And do you bring in an outside firm to aid you in that and to do the work?
Anthony Piszel:

Yes. We have a pretty rigorous quarterly process that we go through. The only thing that we do seasonally is generally in the third quarter, we do a deep dive on our excess comp for evaluation in the fourth quarter. And then generally, we're going to have our independent actuaries actually do their first review using the June 30 numbers. They take a second look at 9/30 and then they finalize their report at the end of the year. And we've had the same independent actuary for a pretty long period of time, so that's pretty routine at this point.
Lawrence Hannon:

You're welcome. Thank you.
Operator:

[Operator Instructions]. Your next question comes from the line of Meyer Shields of KBW.
Meyer Shields:

I want to dig into workers' comp a little bit, if I can. We're hearing somewhat mix messages from different companies about workers' comp retention pricing. I was hoping you could talk about what you're seeing in the market on the excess workers' compensation side. I'm not -- you should be back in it yet, but I was wondering whether that's trending any differently than you'd expected?
Robert Bailey:

So this is Bob. I'll take the stab at. But Meyer, if you could, when you -- you mean excess workers' comp pricing specifically or in general?
Meyer Shields:

Yes. You talked about the primary layer earlier. So I was wondering whether there's anything attractive yet in excess.
Robert Bailey:

I'd be lying if I told you, we keep our -- we've kept our finger on the pulse of that market. I mean, we exited it now almost 2 years ago largely because we just -- we saw more risk. We saw risk building up in that space that wasn't priced in on a go-forward basis. So we chose to part ways with that marketplace. I don't -- I can't say there's less risk. But that -- I would say -- I wouldn't say vast majority, a big percentage -- perhaps even a plurality of that space is first responders, police and fire, municipal type workers. I can't imagine that in these troubled times with COVID or social unrest that, that's a feel good space right now. So I don't believe that the exposure profile we sort of predicted, not that meaning COVID was happening or any of that. But we certainly saw a buildup of exposure. I would tend to still believe that. In fact, maybe even more so, what I'm not certain on, so before I pull fire alarms, I don't mean to -- what I don't know is what is happening to the pricing. I will tell you that historically, over our experience, the excess market tends to run consistent with the primary market. So when you see sort of a flat, lackluster pricing environment in the primary market, it tends to be what customers expect in the excess market. There's no reason for that. They're completely different developments. That -- they're completely different loss scenarios. I realize that. But it does tend to be the way it's worked over the better part of a couple of decades. Maybe that's separated, and maybe that's not true anymore. But that's as much as I can give you, Meyer, on a kind of a college knowledge, but understand my perspective is dated a couple of years.
Meyer Shields:

No, that's very helpful, I thought. I think, Larry, you talked a bit or made the point that, obviously, the biggest impact of COVID so far has been on premium volumes. I was hoping if you could get to secondary impacts, and not looking for prediction, because who knows. But if we were in the normal environment this year, if next year turns out to be more normal, how should we think about the impact of what the recovery in Media and Entertainment, recovery in Transportation premium on the expense ratio part?
Lawrence Hannon:

So it's a great question. It's very, very dependent on when we start to see that bounce back, of course, as you know, right, because we need to see the earned come through. So if we get it earlier in '21. For example, if we had fourth quarter -- if you had a vaccine, if we had that scenario that you played out, that it started to bounce back to normal. Yes, the premiums will go up by 25%, 30%, 40%, that -- as compared to what we've seen over the last couple of quarters. So you'll see that bounce on the premium side. And then as when that starts to earn, that will certainly help on the expense side. We think it's probably like the way that we would model it, just to give you a general sense, if it was a first half, normal versus waiting until the second half for that to be normal. The impact in 2021 could be anywhere between like 300,000 and 500,000 basis points on the expense ratio. So that will give you a general flavor as to what the time would be in '21. The impact in '22 would be very significant. Right? And that's one of the things that we feel confident about when we talk about the 200 basis point improvement. That could be a pretty significant number.
Meyer Shields:

Two other quick questions, if I can. With regards to G&A in the quarter, was there anything unusual, maybe a pullback in the sense then because of other constraints? Or is this a decent run rate for the world we're in?
Anthony Piszel:

No, it's not a decent run rate. It's a little on the low. We did some COVID tightening of our belts in the quarter. We're also still benefiting from lower T&E. So I wouldn't use the $23 million as a run rate, Meyer. We're still trying to think around, ultimately, what is the run rate post COVID based on the timing of that. So we'll be doing some more work in the fourth quarter. But the $23 million is not a run rate number. It's too low.
Meyer Shields:

And then finally, is there any way of getting a sense as to exposure to the fourth catastrophes you've had so far?
Lawrence Hannon:

You trailed a lot there, Meyer, could you say that again.
Meyer Shields:

Yes. So we've had a couple of fourth quarter hurricanes or whatever. And I was wondering whether there's any sense yet in terms of your exposure, either on a net or gross basis?
Robert Bailey:

This is Bob. I mean, as far as data goes, we've experienced very little. It's probably far too soon to spike the ball, but there's only been a couple of claims that have been reported. Prior to that, I'm trying to make sure I understand what got pushed in the third -- 3Q versus 4Q versus --
Lawrence Hannon:

I think delta -- I think delta is probably -- what we know right now is a few million dollars data, too early to tell, but doesn't look significant. And those are -- I think those are the big ones that I think about for the fourth quarter. Yes.
Operator:

Your next question comes from the line of Mark Hughes of Truist.
Lawrence Hannon:

Exact 20 seconds, Mark.
Mark Hughes:

Well, if it's a good meal, you want to come back. Delta is a few million, is that growth or is that net?
Lawrence Hannon:

Net.
Robert Bailey:

That would be -- well, it's probably both, frankly.
Lawrence Hannon:

Yes, it's true. But -- yes, I'm giving that number.
Mark Hughes:

And then the three buildings, we do assume those are fire loss -- just total losses?
Robert Bailey:

Let's see. The three buildings -- actually, one was a fire loss, and the rest were wind storm. I'm sorry, two were fire loss. One was an Oregon loss. One was a fire loss. One was -- the big one was a wind storm. It was part of the hurricane.
Lawrence Hannon:

It was Laura, yes.
Robert Bailey:

Laura.
Mark Hughes:

And then what was the --
Anthony Piszel:

I just know there difference is 20
Mark Hughes:

What was the gross earned premium in 3Q?
Robert Bailey:

The gross in terms of all-in?
Lawrence Hannon:

Or just property?
Mark Hughes:

All-in.
Lawrence Hannon:

The gross written for all in was $203 million.
Mark Hughes:

How about the gross earned --
Lawrence Hannon:

-- for this quarter -- for the earned number.
Mark Hughes:

Bob, do you have the earned number at your finger tip?
Robert Bailey:

Yes. I'm looking for it. Give me a minute.
Mark Hughes:

I'll throw out also the -- you talked about the opportunity in captives -- active pipeline in captives. Can you just talk a little more about that? What's driving it? How material it could be?
Robert Bailey:

This is Bob. From a captives perspective, we're excited about it. We do have a good number of high quality opportunities I think, in the pipeline. We've already executed on about half a dozen of those, about 5 or 6 of them. To us it's very consistent what the strategy is in terms of -- it is sort of the ultimate manifestation of a niche strategy when they're actually coming together and forming and taking on their own risk and starting to determine their own underwriting selection standard. It's just -- it's a wonderful thing to see, quite frankly. That said, we're generally looking at certainly providing -- providing upfront, so it's largely fee income from upfront, largely fee income from loss -- from claims handling. And then depending on the specifics of the risk, depending on the specifics of the exposure, we might provide some sort of -- for risk stop we might provide an aggregate cover and agg stop we might provide any -- some combination of that. So I don't know how much more specifity you want.
Anthony Piszel:

Yes, Mark, gross earned in the quarter is $207 million.
Robert Bailey:

Sure.
Operator:

Your next question comes from the line of Yaron Kinar of Goldman Sachs.
Yaron Kinar:

I'm back for a second as well.
Lawrence Hannon:

Outstanding. It's always good to have you guys back. Yes.
Yaron Kinar:

In Transportation, I think you called out a 50% decrease in bus and taxies, but I think overall premiums are up for the quarter. Can you maybe talk about some of the offsets there where you're seeing growth?
Lawrence Hannon:

The offsets are on the growth side of the captives. So there's a couple of places that you have on the Transportation side that -- of that $17 million, I don't know the number off the top of my head. But I want to say it was like $13 million or $14 million or the predominant part of that where the cap is. And so we just categorized it in the Transportation sector, Yaron. And that would, of course, been against the 0 last year.
Yaron Kinar:

And then on the limited partnerships, can you just give the dollar and percentage amount of the returns this quarter?
Anthony Piszel:

Yes. The returns for the quarter were $5.5 million. It was a 30% annualized return for the quarter, and that compares to about $0.5 million in last year's quarter. So, again, pretty sizable. If you remember, in the first quarter we lost $8 million. We got a lot of it back in the second quarter. And, again, this has been a really strong quarter.
Robert Bailey:

Good luck.
Lawrence Hannon:

Thanks.
Operator:

There are no further questions over the phone lines at this time. I turn the call back over to the presenters.
Joe Hathaway:

Thank you, Ian. We appreciate everyone joining for the call today. Thank you for listening in to the third quarter 2020 ProSight Global earnings call. Have a great rest of the day.
Lawrence Hannon:

Thanks, everyone.
Robert Bailey:

Thank you.
Anthony Piszel:

Thank you.
Lawrence Hannon:

Yes, cheers.
Operator:

This concludes today's conference call. You may now disconnect.

ProSight Global, Inc. Q3 2020 Earnings Call Transcript

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ProSight Global, Inc.
Q3 2020 Earnings Call Transcript